Conflict of Laws Cannot be Wished Away

A curious judgment has been rendered recently by the highest court of Germany in civil matters. The Federal Court (BGH) considers a long-term rental agreement for an apartment in Germany as a ‘purely domestic matter’ (reiner Binnensachverhalt) – even though it was concluded between a foreign state and one of its nationals, who still had a residence in the foreign country. Moreover, the rented apartment was adjacent to the foreign country’s embassy and the contract had been drafted in the language of the foreign state. In the eyes of the BGH, none of this constituted a relevant connection to another law.

In a Wonderland

Whoever has read about this judgment (reported also on conflictoflaws.net) may have been left wondering what is going on. Was the German court in Looking-glass House, seeing everything upside down, and what is outside as inside? The decision is even more astonishing when compared to the recent CJEU judgment in Inkreal, which considered a contract between two parties from the same country as falling under Article 25 Brussels I bis. Although the context is different – choice of forum there, choice of law here – and the applicable provisions as well – Brussels Ibis there, Rome I here –, the contrast with the BGH position is quite stark. While the CJEU allows parties to internationalise an obviously domestic situation through the choice of a foreign court, the BGH nationalises an obviously international situation.

Why?

The German case may be best understood by starting from its outcome. The denial of any foreign connection – except the choice of law – allowed the Federal Court to make use of Article 3(3) Rome I. As a result, it could apply the mandatory rules of German rental law, despite the fact that the parties had explicitly submitted the contract to the law of the foreign state that owned the apartment. According to the mandatory German rules, any time-limit in a rental contract for which the landlord has not provided a justifying reason in writing is deemed to be of infinite duration. The purpose of the BGH’s reductionist view is thus clear: protecting the tenant by characterising the contract as purely domestic. But was the method to get there legal?

Connections to Germany

The Federal Court argues that the contract would be purely domestic because the apartment was situated in Germany, which under Article 4(1)(c) Rome I is the decisive connecting factor for determining the governing law. Yet this argument is specious. It ignores that the applicability of Article 4(1)(c) Rome I does not exclude connections to another country. Quite to the contrary, the provision even presupposes foreign connections, because without them, there would be no need to conduct a conflict-of-laws analysis.

Equally unconvincing are the other arguments with which the Federal Court tries to prove the ‘purely domestic case’, such as that the contract has been entered into in Germany, or that the tenant and his family had lived there for 16 years. While these facts undoubtedly create strong connections to Germany, they do not make the foreign elements go away.

Foreign Connections – When Are they Relevant and When Not?

So let us turn to these connections to other countries, which according to the German Federal Court, are not sufficiently relevant to make the case ‘international’.

The first of them is that the foreign state is the owner of the apartment. The Federal Court rightly brands such ownership as irrelevant, as in contract law only the person of the landlord counts.

Yet the very same foreign state, or at least one of its Ministries, also was the landlord. The Federal Court thinks this does not matter either because the contract was handled through the foreign state’s German embassy, which would lead to the application of Article 19(2) Rome I. Again, the court falls prey to the same mistake: the fact that a provision ultimately leads to a certain law does not mean that the case would be ‘exclusively’ connected to that law. Quite to the contrary, the need to resort to a conflicts rule like Article 19(2) Rome I is created by the existence of a connection to another country, namely the principal place of business or domicile of the foreign counterparty. This foreign element cannot be ‘irrelevant’, as the Court thinks, because it triggers the application of a conflicts rule.

On the other hand, it is true that not every connection to a foreign country – apart from the choice of its law – qualifies as a foreign element under Article 3(3) Rome I. The nationality of the tenant does not seem to be among them, because it is of very little relevance in the Rome I Regulation (apart from the very specific situation of Article 7(3)(c) Rome I). Yet the present case was characterised by an abundance of relevant foreign connections – the landlord was a foreign state, the tenant had kept a residence outside of Germany, and the language of the contract was not German. To speak nevertheless of a ‘purely domestic case’ and apply Article 3(3) Rome I is simply disingenuous.

Avoiding the Rabbithole

So what should the Federal Court have done instead to protect the tenant, if we accept that there was a need to so? The court of appeals had suggested applying the German mandatory rule under Article 11(5) Rome I. However, this provision covers only rules regarding the formal validity of the contract, and the German rule is arguably more substantive than formal (it requires a good reason to limit the duration of the rental contract and not just the mentioning of any reason in writing).

The application of Article 6 Rome I would not have worked either, as the contract concerned a tenancy of immovable property. Such contracts are excluded from the scope of the consumer protection provisions by Article 6(4)(c) Rome I. The purpose of this exclusion apparently is to give priority to the law of the state where the immovable is situated. Yet the exclusion also – perhaps inadvertently – opens the way for free choice of law under Article 3(1) Rome I.

The only avenue to make the German rule prevail would therefore have been to use the rules on overriding mandatory rules of the forum in Article 9(1) and (2) Rome I (this is done for instance by the Austrian Supreme Court). The BGH may have had qualms to qualify tenant protection laws as overriding mandatory rules, given that they serve primarily private interests. In reality, however, the protection of private and public interests do not exclude each other. While tenancy law serves the interest of weaker parties, it is also underpinned by public interests, e.g. to avoid homelessness, public disorder, and the need for state-provided housing. To discuss the importance of these objectives would have been more honest and transparent than to stylise the case as ‘purely domestic’.

To avoid such inaccuracies in the future, we need a debate on the elements that qualify as ‘foreign’ under Article 3(3) Rome I. Which are they, and what way are they different from the foreign elements that lead to ‘situations involving a conflict of laws’ in the sense of Article 1(1) Rome I? Also, we need to discuss the relation between Article 6(4)(c) and Article 3 Rome I: Did the EU legislator really intend to allow parties to freely choose the law governing tenancy contracts, even where consumers are involved? And finally, we need a debate whether tenancy law qualifies as ‘overriding mandatory rules’ under Article 9 Rome I.

— Thanks to Felix Krysa, Verena Wodniansky-Wildenfeld and Paul Eichmüller for critically reviewing this post.